Incentives in Competitive Search

Abstract

This paper proposes a labor market model with job search frictions where workers have private information on match quality and e¤ort. Firms use wage contracts to motivate workers. In addition, wages are also used to attract employees. We de ne and characterize competitive search equilibrium in this context, and show that it satis es a simple modi ed Hosios rule. The model is used to address the "Shimer puzzle" related to the low volatility of the unemployment rate relative to the volatility of output observed in the data. We nd that private information may increase the responsiveness of the unemployment rate to changes in productivity and in particular to changes in the information structure.